Fitch Ratings has revised its outlook for the underlying fundamentals of the London market insurance sector to negative from stable (the sector outlook). The sector outlook revision reflects increased concerns over the COVID-19 disruption and the related impacts on the credit quality of London market insurers.

Fitch’s outlook for ratings levels in the sector remains stable (the rating outlook), although it expects to revisit the rating outlook again as its analytical work related to COVID-19 advances.

Fitch is reviewing its insurance ratings relative to assumptions with respect to the impact of COVID-19 disruption on capital markets volatility, interest rates, market liquidity and insured claims/reserves. Fitch will compare the pro-forma profile of an insurer relative to its existing ratings sensitives. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative (RWN) or downgraded. Fitch is at the early stages of this review.

Currently Fitch believes that the ratings of London market insurers will be less affected by the COVID-19 outbreak than those of European life insurers, whose rating outlooks were recently revised to negative. However, Fitch’s stable rating outlook for the London market sector does not imply that there will be no impact on ratings in the sector.

We are prioritising ratings that currently have a Positive Outlook during the review process. In addition, Fitch expects the ratings of some London market insurers could be placed on RWN. Near-term downgrades are possible, but currently viewed as unlikely.

Falling equity markets, widening credit spreads and declining interest rates are all negative for capital. London market insurer bond portfolios are mostly highly-rated, but widespread downgrades could weaken capital ratios. We expect the impact on underwriting performance to be more limited, with the biggest exposure coming from event cancellation, business interruption and accident & health lines. The low interest rates add to pressure on investment earnings from already ultra-low bond yields.

Fitch revised the sector outlook for the London market to stable from negative in November 2019 reflecting improved pricing conditions and the expectation that improved underwriting results would start to emerge from 2020. However, we still considered there were significant challenges, given the stubbornly high expense ratio for the market as a whole, continued low investment yields and the need for reserve strengthening in US casualty lines.

Furthermore, the rapid spread of COVID-19 could increase operational risks for the implementation of the Future at Lloyd’s project, which aims to modernise the market and make it more cost efficient. Business transacted in the London market typically relies heavily on face to face interaction and this could be significantly disrupted if the COVID-19 outbreak is prolonged.